Corporate guarante

[KARAN VERMA]

Sir

Whether GST applicable in case of corporate guarantee given to sister concern.

Further, if full time director gives personal guarantee to company, whether RCM applicable.

[KASTURI SETHI]

Query-wise answer is as under :-

1. Yes. Such service is covered under Schedule-1 (serial no.2). HSN 999799.

2. In such scenario, if no consideration is received, it is no supply under Section 7 (1)(a) of CGST Act. Hence no GST applicable. In case there is consideration in any form (directly or indirectly), Director of the company himself is liable to pay GST under FCM.

HYPOTHETICAL SITUATION (for the purpose of more clarity and safety)

Another suggestion/aspect is that in order to be risk-free or you may say to be in comfortable zone, I am of the view that there is nothing like 'personal' in this situation and full time director is a guarantor in the capacity of a director, the company should pay GST under RCM and avail ITC. HSN 999799. This situation i.e. without consideration is covered under Schedule-1 (serial no.2).

[Ganeshan Kalyani]

Sir, full time director would cover under employer-employee relationship and service in the course of employment given by director would be compensated by salary. So, no GST.

Sri Kasturi Sir - Please clarify my understanding.

Is the director compensated for personal guarantee separately i.e. in addition to salary is he paid.?

[Shilpi Jain]

Corporate guarantee also, valuation is an issue which can be fatal to the levy itself.

Also for director guarantee I agree with Ganeshji...

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Your understanding is correct. Strings are attached. The moot point is whether Director is an employee of the company or not. It depends upon the terms and conditions of the contract/agreement. One of the major criteria is that there must be clause of 'Hire & Fire" in the agreement/contract, if director is an employee. There are other crucial factors also. Sometimes one person works as Director as well as employee in the same company. If employer-employee relationship exists, I fully agree with you.

My reply does not end here. This reminisces me an anecdote. During my posting in Range Office one employee who gave personal guarantee for the company when the relations were cordial. Later on after a few years, the company became sick and the employee who gave personal guarantee was dragged to the court. So giving a personal guarantee is not just putting signature. It owns a huge liability/responsibility on the guarantor and in that eventually where cost of personal guarantee (indirect consideration) will go you can well imagine.

Nobody will like to give personal guarantee for the company without any consideration (hidden or otherwise). Will you like to take such risk ? I mean to say that there is no 'free lunch'. Every service or goods has a cost directly or indirectly. You know very well as you are expert in commerce whereas I have no commerce background.

In your reply, you have raised a very very important query.

"Is the director compensated for personal guarantee separately i.e. in addition to salary is he paid.?"

In your query, the element of 'consideration' is inherent. Am I right ?

Looking forward for your response.

Thanks & regards for reposing faith in me.

K.L.SETHI

[Ganeshan Kalyani]

I agree with you Sir.

[Shilpi Jain]

I understand that the directory is required to give guarantee for which, as per the Companies Act provision, he cannot charge any consideration as well.

So as per law also he cannot charge anything. What happens out of books remains out of books only. So that cannot become a reason for levying GST.

In many instances the dept is aware of consideration outside. Though nothing much can be or is proved.

[KASTURI SETHI]

'Out of books' is a separate issue. Whenever we answer to a query of any querist, our reply integrally relates to whatever is in the books of accounts/records. If no consideration in the course or furtherance of business exists in the books of accounts and other records directly or indirectly that service will be out of definition of supply as per Section 7 (1)(a) of CGST Act

AI Summary

GST on corporate guarantees depends on existence of consideration; absence means no supply, else tax liability arises. GST on corporate guarantees depends on recorded consideration: if no consideration is reflected in books the transaction is not a supply under Section 7(1)(a) and no GST arises; if consideration exists the guarantor may be liable and one may alternatively treat the obligation under the reverse charge mechanism with the company discharging tax and availing input tax credit. Characterisation of a director's guarantee turns on whether an employer employee relationship exists; valuation and 'out of books' consideration are enforcement concerns.